straddles... how do they make money?

[ironchef]

You would also be implying an OTM call is better than an in the money call.

He knows something you don't: He only buys OTM options.

 

[spindr0]

• The example you posted is purely a directional trade.
• Again using your example a strangle would blow the straddle out of the water when it comes to profit.

For a big move, a strangle might blow the straddle out of the water in terms of ROI but not in terms of $$ profit... unless there was a distorted IV smile causing the straddle to cost more than the strangle premium plus the difference in strikes of one side (the vertical). Theoretically possible but practically, not.

 

[spindr0]

• MSFT to $149.00 right before expiration.
• Straddle: $49 ITM / $4.61 = 10X trade.
• Strangle: $34 ITM / $0.13 = 261X trade.

The straddle is more profitable ($44.39 versus $33.87)

ROI is better for the strangle.

 

[vegamedic]

Straddles/Strangles are more of a directional trade - rather than a volatility trade.

I'm convinced you're running a parody account at this point.